Never Lose Another Auction
In response to the increased efficiency of the market for active sellers to maximize valuations, additional strategies are required. An Acquisition Program (“AP”) that surfaces passive sellers at reasonable valuations works in concert with conventional sourcing strategies and can produce significant strategic and financial benefits. The benefits of developing a pipeline of proprietary acquisitions are manifested through superior valuations, strategic choice and increased activity levels.
Proprietary Deals are Superior to Auctions
There are a number of strategies involved in developing an effective acquisition pipeline that can ultimately lead to proprietary deal flow. In assessing potential vendors to develop our acquisition pipeline, we focus on,
- Surfacing vendors who may not be actively looking to sell (‘passive sellers’);
- Offering reasonable valuations to vendors, especially where price may not be the sole consideration; and
- Finding strategic targets that offer the greatest benefits and synergies to our clients.
In developing an AP for our clients, we take a proactive rather than a reactive approach. We focus on what makes strategic sense, not just what’s available. Targets are selected based on strategic priority and highest expected synergies. Surfacing passive sellers not only moderates valuation, it reduces the likelihood of the target being auctioned once an approach has been made.
Reasonable acquisition valuations enhance value creation. For many vendors, price is not the sole consideration. A discreet negotiation with a single credible party is often preferable, even if the valuation they achieve is lower.
For auctioned targets, the vendor and their agent drive the sale process, including schedule and access. With a passive seller, the acquirer controls the pace of approaches and the pace within each transaction process. The acquirer can sequence targets according to their priorities and take sufficient time to conduct thorough due diligence and develop relationships with the vendor(s) and management. This enhanced process control also facilitates the use of risk mitigating transaction structures, such as deferred or contingent consideration that are more difficult to apply in auction situations.
Significant Value Enhancement through Creation of an Acquisition Pipeline
An Acquisition Pipeline also leads to inverse auction dynamics. In general, negotiating leverage is critical to valuation and terms. This is typically the advantage enjoyed by the vendor in an auction. An AP will often generate a pipeline of proprietary targets, each vying for our client’s time and focus. It is much easier to move past sticking points when the seller knows that other acquisition targets are in the queue. Conveying, whether subtly or directly, that our client is reviewing many similar opportunities creates some competitive tension and urgency for the vendor.
More on Passive Sellers
Many vendors are very private and wary of hiring an intermediary to launch a sale process. For various reasons, most companies have no knowledge of, interest in or desire to auction their company today. However, many of these are passive sellers that would entertain an approach from a serious party. At a given point in time, active sellers represent a fraction of the available acquisition opportunities. We have tracked target response rates, and our experience suggests that 10-80% of a given target universe, depending on the industry and target size – or about 25% on average, are passive sellers who welcome an approach from a professional, motivated and well-funded suitor. We help our clients identify these passive sellers and structure the acquisitions accordingly.